CEO compensation contracts of family firms

Compared to non-family firms, family firms with professional CEOs face less severe agency problems arising from the separation of ownership and management. This study examines how this characteristic affects family firms' CEO compensation contracts. I consider the following five aspects of CEO compensation contracts: (1) the proportion of compensation that is equity-based; (2) the level of total compensation; (3) the design of CEO annual bonus plans; (4) the pay-earnings sensitivity of annual bonus payments; and (5) the sensitivity of future economic benefits to CEO's equity based compensation.; Using a sample of S&P 500 firms, I show that U.S. family firms are less likely to grant stock options and restricted stocks to their professional CEOs. Further, they are less likely to adopt target ownership plans to require their CEOs to hold a minimum level of stock ownership. I also find that family firms pay lower levels of total CEO compensation. Moreover, the description of annual bonus plans in the proxy statements reveals that family firms use fewer performance measures, are less likely to use non-financial performance measures, and use more discretion in determining CEOs' annual bonuses. Further, family firms exhibit higher pay-earnings sensitivity in the actual CEO annual bonuses. Finally, family firms exhibit greater sensitivity of future profitability to CEO's equity compensation.